Taxes in retirment - can you help me figure this out?

[schildi]

Hi all!

I am trying to come up with a tax strategy for early retirment, as I may be entering that very soon.

Here is a very confusing thing that I discovered today, and maybe you guys can help me explain this?
So I went to www.1040.com/estimate/ to run a few test cases, and numbers.

Here is what I entered (left all other fields untouched):
filing status: married, filing jointly
age: 55/53 (me / spouse)
wages: $35k
qualified dividends: $0
long term cap gains: $20k

the result reported: 
AGI = $55k
taxable income: $27,300
tax due = $733

So far, so good. probably makes sense.
But here it comes:
When I change the qualified dividends to $10,000, that changes the result to the following:
AGI = $55k (same)
taxable income: $27,300 (same)

tax due = $0

Yes, with an additional $10k in qualified dividends, the tax due is redued to zero from $733.

This doesn't make sense to me. Is this a glitch in their calculator?
Or is there a good explanation for this?

[MN-Investor]

Dinkytown.net is a fantastic site for many financial calculators including tax calculators. I strongly suggest dropping your numbers into their calculator. Qualifying dividends are taxed like long term capital gains. In your situation, they would be taxed at 0% so should not impact total taxes.

www.dinkytown.net/java/1040-tax-calculator.html

[minnesotapaintlady]

I played around with the calculator and don't get it either.  It seemed to only reduce taxes when I put the capital gains under short-term.  Long-term didn't change anything, so unless there is some kind of offset to STCG with qualified dividends I think the calculator has a bug.

[schildi]

May 20, 2024 13:01:41 GMT -5 minnesotapaintlady said:

I played around with the calculator and don't get it either.  It seemed to only reduce taxes when I put the capital gains under short-term.  Long-term didn't change anything, so unless there is some kind of offset to STCG with qualified dividends I think the calculator has a bug.

So you are getting the same results that I get, right?

[schildi]

May 20, 2024 13:00:02 GMT -5 MN-Investor said:

Dinkytown.net is a fantastic site for many financial calculators including tax calculators. I strongly suggest dropping your numbers into their calculator. Qualifying dividends are taxed like long term capital gains. In your situation, they would be taxed at 0% so should not impact total taxes.

www.dinkytown.net/java/1040-tax-calculator.html

Thanks, I will play around with it tonight ...

[minnesotapaintlady]

May 20, 2024 13:16:08 GMT -5 schildi said:

May 20, 2024 13:01:41 GMT -5 minnesotapaintlady said:

I played around with the calculator and don't get it either.  It seemed to only reduce taxes when I put the capital gains under short-term.  Long-term didn't change anything, so unless there is some kind of offset to STCG with qualified dividends I think the calculator has a bug.

So you are getting the same results that I get, right?

Yes, it's showing less tax due with qualified dividends added on.

[schildi]

May 20, 2024 13:00:02 GMT -5 MN-Investor said:

Dinkytown.net is a fantastic site for many financial calculators including tax calculators. I strongly suggest dropping your numbers into their calculator. Qualifying dividends are taxed like long term capital gains. In your situation, they would be taxed at 0% so should not impact total taxes.

www.dinkytown.net/java/1040-tax-calculator.html

This calculator doesn't have the issue.
It tells me to enter "ordinary dividends", which is total dividends, and can't be less than "qualified dividends".
The 1040k.com calculator doesn't have that option, and I think that's where it goes south. It probably has an indirect calculation where it subtracts from your tax due when it sees qualified dividends, or something to that extend.

I will now use dinkytown, seems to be the better calculator!

[jeffreymo]

I think it’s actually a -733, meaning you would receive a refund because your income level would qualify for a refundable credit. After adding the qualified dividends you still do not have a tax bill but the AGI disqualifies you from a refundable credit? Somewhat a guess because I don’t have a 1040 form in front of me at the moment.

[jerseygirl]

Doesn’t qualified refer to something like an IRA?

If so not dividends , only regular income

[schildi]

May 20, 2024 17:35:21 GMT -5 jerseygirl said:

Doesn’t qualified refer to something like an IRA?

If so not dividends , only regular income

Qualified dividends are treated the same as long term capital gains, meaning they are taxed at a lower rate than regular income (0%, 15% or 20%, depending on the total taxable income).

[schildi]

May 20, 2024 15:38:59 GMT -5 jeffreymo said:

I think it’s actually a -733, meaning you would receive a refund because your income level would qualify for a refundable credit. After adding the qualified dividends you still do not have a tax bill but the AGI disqualifies you from a refundable credit? Somewhat a guess because I don’t have a 1040 form in front of me at the moment.

I don't think that's the case.
Everything entered is an income, not a deduction or refund, and therefore there should be no refundable credit.
It also clearly states that the $733 is the "balance due". Below is a copy and paste from 1040.com:

Balance Due $733

AGI: $55,000

Taxable Income: $27,300

Total Tax: $733

I think it's a mistake on their website.